The Dependency of the Banks' Assets and Liabilities: Evidence from Germany

Two decades of developments in risk†transfer instruments may have fundamentally changed the extent to which banks practice on†balance sheet term and liquidity transformation. These changes should be deliberated in on†balance sheet asset†liability dependencies. By using correlation analyses, we investigate asset†liability dependency for all three sectors of German universal banks from 1994 to 2007 and find that it declined over our sample period. We also investigate whether asset†liability dependency varies systematically with a bank's affinity for using risk†transfer instruments, regulatory capital, and profitability and document several differences between the three sectors of German universal banks.